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 Dealing
with an Uncertain Economy
In an effort to help both funders and nonprofits
cope with current economic uncertainty, Donors Forum has compiled
a list of resources that can be helpful in formulating both
short and long-term strategies for funders and nonprofits.
We are continually updating these resources, so please check
back often for new materials.
Donors Forum Articles
Donors Forum Resources
Additional Reading
Coping
with Economic Uncertainty
from the March, 2008 issue of Forumnotes
It's never financially easy to be a nonprofit,
but many are experiencing tougher-than-usual economic times
lately. Cuts in the Illinois and federal budgets, an increased
demand for services, and the recent downturn in the U.S. economy
– expected by many to worsen -- are adding to the financial
stress many nonprofits feel. Adding to nonprofits' economic
reality is the psychological effect that news of a possible
recession can have on individual donors.
"I don't know whether we're in a recession
or not, but it's obvious that we are in a period of difficult
economy," said Edith Falk, President and CEO of Campbell
& Co., a company that provides consulting services
to the nonprofit sector. "Fundraising tends to lag behind
the economy by six to nine months," she continued, adding
that it will be well into Spring before nonprofits feel the
full brunt of current economic conditions.
"It's important for our sector to be
prepared," said Valerie S. Lies, President and CEO of
Donors Forum. "And to that end, providing both
our Members and Partners with ideas and coping strategies
to deal with reduced funding has been a major part of recent
discussions by our Board of Directors," she continued.
Here, we've distilled comments from these discussions.
How Grantmakers Can Help
Several Donors Forum Board Members stressed the importance
of grantmakers' funding operating expenses, and of nonprofits
having an operating reserve. Also, a long-term strategy of
awarding grants based on the previous 12 trading quarters
(a "trailing average") can creating a buffer against
a changing economy.
But "regardless of the fall or rise
of assets," said Carmen Prieto, Associate Director of
the Wieboldt Foundation," there has to be transparency
of a foundation's grantmaking priorities and guidelines, so
that nonprofits can plan accordingly."
For example, if market forces will affect
the size or number of grants a grantmaker can award, grantees
should be alerted to this. Similarly, grantmakers should give
grantees ample notice if a grant will be an exit grant, or
the last one the grantee can expect.
"It's also important for foundations
to support capacity-building efforts so that nonprofits can
develop a healthy infrastructure," continued Prieto.
To help grantees, funders can offer tools
and information on developing a planned giving program. Funders
can also give grants that can be used to generate matching
funds, whether from a new or existing pool of individual donors.
Grantors are also encouraging and facilitating
mergers and partnerships that help grantees reduce expenses.
The Chicago Community Trust, along with The United
Way of Metropolitan Chicago, recently committed to funding
a partnership of nine large human service agencies that will
consolidate back-office operations.
Strategies for Nonprofits
For most nonprofits, it has become vital to develop a diverse
revenue stream. "More and more," said Prieto, "I
see nonprofits moving toward developing some type of individual
donor base; that can be through a variety of ways – personal
solicitation, direct mail, or implementing a planned giving
program."
"Try not to cut your development budget
or activities," said Falk. "I know it's a tall order,
but see if there are other places you can make cuts. Cut where
the return on investment is the least productive." Each
organization should figure out which activities are the most
productive, and focus on them. For instance, look at your
special events. If they aren't productive, consider revising
the format. Instead of working on donor acquisitions, concentrate
on the donors you have. "At times like this, CEOs and
development staff should be out the door and talking face
to face with donors," Falk said.
Falk also stresses that for nonprofits, it's
important to stay in touch with donors. Organizational newsletters
are a great way to do this. And, if you have been collecting
email addresses, now may be a good time to switch to an electronic
newsletter. "Electronic newsletters allow you to send
out information on your organization more often at far less
cost," she said.
When you communicate with donors, Falk continued,
be sure to remind them of your mission and why it's important
to keep funding in uncertain economic times. For instance,
social service organizations can experience cuts in government
funding and a longer reimbursement period; they also typically
experience a greater demand for services during economic downturns.
Arts organizations can suffer from reduced ticket sales. "The
economy can be tough because people stop spending, not only
stop giving!" she said.
Two simple steps nonprofits can take to lessen
the likelihood of reduced giving by current individual donors
are sending out pledge reminder cards or emails, and offering
to renegotiate a longer pledge payout period. It's also important
to remind individual donors to check with their employers
about a matching gifts program.
"In an uncertain economy," reminded
Falk, "donors tend to take longer to make decisions –
especially for large donations – and they tend to stick
with those nonprofits they've funded in the past, and cut
those that are new on their list."
It is vitally important for both grantmakers
and nonprofits to continue to support and conduct advocacy.
"After all," said Jeanne Kracher, Executive Director
of the Crossroads Fund, "the economy is not a
germ in a Petri dish. The government makes decisions about
what and what not to spend money on, and those political policies
drive the market and the economy."
In economically challenging times, it also
behooves nonprofits to remain diligent in practicing good
governance and adhering to best practices, as put forth in
Donors Forum's Illinois Nonprofit Principles and Best Practices.
Donors Forum's workshops on leadership, management, evaluation,
best practice how-tos, and governance can also help nonprofit
staffers develop and hone skills that become even more critical
when funding is tight.
From
the Trenches: Dealing with Economic Uncertainty
from the April, 2008 issue of Forumnotes
To continue our exploration of the economy
and our sector, this month we'll look at the experiences of
some Forum Partners, and steps they are taking to cope with
current or anticipated economic downturn.
Have a Plan
"One of the first things I did [as our organization's
first Development Director] was to write a development plan,"
said Sharmila Kana, Development Director at Apna Ghar,
Inc., a domestic violence shelter in Chicago for women
and children. "A healthy nonprofit is about 80 percent
funded by individuals, private foundations, and corporations,
and 20 percent by the government. Thanks to sticking to our
plan, we're well on our way there," she continued.
Karen Freitag, Executive Director of Southern
Illinois Regional Social Services (SIRSS), an organization
in Carbondale that provides substance abuse and mental health
services in Jackson County and surrounding areas, said that
vigilance in all areas is important. "We have a monitoring
system in place to look at our finances as well as our programs,
because we have to be able to adjust on a regular basis,"
she said. "We have integrated this look-see process into
our management team process."
And, Freitag continues, "We are always
looking for additional funding sources that fit with our mission.
It's part of our culture around here."
Experiences with Government Funding
"Here we go again," said Development Director Cynthia
Frahm, referring to what looks like a continued downturn in
state funding for arts organizations like Chicago Dramatists,
a professional theater that develops and advances playwrights
and new plays. "The state has been instituting cuts to
arts funding, and that's hit us and so many theaters, museums,
and schools throughout Illinois."
Not all nonprofits are affected equally by
government cuts, however. "We've been fortunate to just
see a reduction – and really not very much of one –
in our government funding," said Kana. "And I have
to salute them -- our major government funders had already
told us that there would be cuts coming, and we were prepared
to look at it that way."
How does Freitag's social service agency
respond to cuts? "Sometimes our response is advocacy
– to fight against the cuts," she said. "Or,
if we're stuck with it, we may have to cut personnel or services.
We have to look at how we are going to balance the budget."
Clara Miller, President and CEO of Nonprofit
Finance Fund, an organization that provides services to
create a strong, well-capitalized and durable nonprofit sector,
says that if a nonprofit offers services that will lessen
the negative impact of an economic downturn (such as job retraining,
food kitchens, and housing services), they should approach
government funders more aggressively. "Nonprofits should
propose revenue-neutral changes if the government can assist
it with expansion during a recession, or improving its practice
within the context of its mission" she noted.
Financial Strategies for Times of Recession
NPFF's Miller also said there are specific financial strategies
that nonprofits need to employ as soon as conditions indicate
a recession may be coming. Nonprofits heading into recession
need to avoid "strong, silent behavior" and sustained
spending, which as been a hallmark of the industry for more
than a decade, and continues to make nonprofits weaker, not
stronger," Miller explained. "We are entering a
period of financial crisis, and we can't afford to 'fake it
until we make it.' This heroic type of behavior does no one
any good in the long run. Nonprofits need to share worries
with boards and funders, and enlist their support in getting
ready for a possible recession. Organizations need to try
to get by on decreased revenue and programmatic spending for
a year or two in light of new financial indicators, before
moving forward with challenging expenses," she continued.
Miller advises nonprofits to engage with
board members and funders in contingency planning on what
is likely to happen to clients and funders during a recession.
"The end clients are especially important, as they face
the greatest risk. . .in times of financial stress,"
she said. "The goal of surviving a recession is not to
stay afloat for the sake of staying in business, but rather
to make sure you're around to keep serving the public, Miller
continued. "It's important to get board members and funders
to go public with that message."
Another strategy is to avoid large investment
in fixed assets and infrastructure, such as a building purchase,
new hires, or expansion of services. If growth or retrenchment
is likely, nonprofits need to work with funders and board
to build a cushion to allow flexibility and course corrections.
"As economist Peter Bernstein put it, 'Risk means not
having cash when you need it.' And that is particularly true
for nonprofits, which often have liquidity problems in the
best of times," Miller said.
Examine Your Revenue Cycle
Nonprofits need to get a firm handle now on their revenue
patterns. Miller continues, "Organizations can examine
revenue cycles to see if they're contra-economy or not. In
some cases, the revenue of nonprofits actually rise during
a recession. If that's true, nonprofits can build growth funding
to allow rapid expansion to meet needs. If the opposite it
true, nonprofits can take actions in step with cushion-developing
approaches."
Organizations also need to get a handle on
the money they are owed -- accounts receivable. "Billing
and collecting your accounts receivable is obviously very
important," said Bob Eder, Senior Vice President, Finance
and Administration at Donors Forum. "Ideally,
get a check or credit card at the time of transaction, or
at least ask for a deposit." he advised. "If that's
not practical for your organization and you need to send a
bill, make sure to ask if there is anything you can do ahead
of time -- like providing a tax ID number -- for them to be
able to pay you promptly.
When sending bills, Eder says, organizations
can write or print "Payable Upon Receipt" or "Net
Ten Days" on invoices.
Another accounts receivable tactic is to
take advantage of electronic technology. Determine if any
of your major suppliers (e.g., funders) would be willing to
pay you via electronic funds transfer -- typically ACH.
This can cut down on "float," and shorten the length
of time to get a payment into your bank account.
Eder also uses a bit of psychology in approaching
accounts receivable. "Many of us are reticent to ask
our clients to pay, but people tend to respect vendors who
are fiscally aware and know they need cash," he advised.
"And, most companies want to pay their bills -- and will
actually appreciate being respectfully reminded to do so."
Regarding accounts payable, Eder offers several
recommendations. "Try electronic payments again,"
he said. "Identify your large vendors -- typically those
you pay monthly. Determine the last day a payment can be made
to the vendor before incurring a penalty. Arrange for the
ACH payment to arrive on that day each month. Always pay on
time; but never pay early."
However, if cash is so tight that you do
have to delay some payments, don't fail to converse with your
vendors. "Don't think vendors will 'forget' you owe them
money -- they won't. Better to call and explain the tight
cash situation," Eder advised. "They'll want to
know when you can and will pay. Commit to a date you'll mail
payment and stick to that commitment. You don't want to damage
good vendor relationships or incur penalties or interest on
your payables. That would only make a difficult situation
worse," he said.
Nurture Your Individual Giving Program
Despite funding cuts, Chicago Dramatists' Frahm considers
her arts organization fortunate. "This past year we instituted
our first individual giving program, and we really had a phenomenal
response -- people really rose to the occasion," she
said. "That's one way we want to combat cuts from the
government." However, she cautions, "We don't know
if our individual giving will plateau, or subside because
of the economy -- and it seems the government cuts will continue
-- so we are looking at long-term strategies now, with our
board and small executive staff."
Kana of Apna Ghar is also concentrating more
on individual donors. "I spend much more time with individual
donors -- showing them our shelter facilities, pressing the
flesh -- than trying to get additional funding from the government.
And it seems to be working," she said. "We have
a capital campaign in effect, and that will be about 90% individual
funded."
"The analogy I use is to look at natural
disasters, such as Hurricane Katrina and the tsunami of 2004,"
Kana continued. "If you look at the government support
and aid that was given, it is actually minute when compared
to what the American people gave. That's how nonprofits should
view funding."
"Tug at the heart strings. Go to people
who feel for your cause, rather than to the government, which
is already financially strained," Kana advises.
Many Practical Ideas
Here are more tips based on the advice of Forum Partners:
- Look for ways to get restricted
grants for staff development budget items.
- Explore new revenue possibilities,
including bank trust residuals.
- Work to exceed expectations for
annual events.
- Take advantage of work-study employees
from local universities to assist with clerical and technology
work.
- Ask staff to carefully watch expenses,
and cut out unnecessary spending.
- Look into sharing office space,
resources, or back-office functions with other organizations.
- Ask current board members for additional
contributions during difficult times.
- Reach out to new board or committee
members who can bring in resources.
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